India Equities
Aviation Sector
Analyst: Rupin Shah
Email: rupin@parsoli.com
Tel: +91-22-40912722
Kingfisher, a UB Group Company,
operate as a Full Cost passenger
service Carrier
Deccan Aviation is a largest
charter aviation company in India
24th January, 2008
Special Report
Deccan set to fly higher
Company Overview
Kingfisher Airlines
Kingfisher Airlines (Kingfisher) is a Bangalore based private airline company of the UB
(United Breweries) Group. UB Group started its aviation business with launching of
Kingfisher in 2005. UB Group currently operates different lines of businesses such as
beverages, alcohol, pharmaceutical, media, research and development, international
trading, fertilizers and infrastructure development. Kingfisher is operating its
passenger and cargo transport service between different cities in India. The company
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operates as Full Service Carrier (FSC). On 23 November 2007, the company has
announced its expansion of routes network with three new services and additional two
new destinations such as Lucknow and Khajuraho. With the launch of these new
services, Kingfisher operates 218 flights a day serving 37 destinations with a fleet of
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36 new aircrafts as on 23 November 2007.
Deccan Aviation
Deccan Aviation Ltd. (DA) is a Bangalore based India’s largest private heli-charter
company. DA provides scheduled and unscheduled air passenger services, including
helicopter charter services. DA is the largest charter aviation company with a network
base of seven locations across the country. The company uses a fleet of 9 helicopters
and 3 fixed-wing aircraft across its bases at Bangalore, Mumbai, Delhi,
Bhubaneshwar, Hyderabad, Surat, Katra (J&K), and Sri Lanka. Air Deccan, a part of
DA, is the first Low Cost Carrier (LCC) company in India. Air Deccan was established
in 2003 and started its operation with regular scheduled flight from Bangalore to
Mangalore and Hubli. Air Deccan was the first airline in India to link second rung cities
like Hubli, Madurai and Visakhapatnam to metros like Bangalore and Chennai.
The company mainly involved in providing charter air services which includes:

Corporate charter service

Emergency services

Offshore oilfield Logistic support services

Helicopter services to tourist location and pilgrimage centers
Apart from charter air service, the company also provides passenger air transportation
service.
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Special Report
With the liberalization of Indian
aviation sector, aviation industry in
India has undergone a rapid
transformation
Excessive regulation and high cost
of air travel were the main reasons
for sluggishness in Indian aviation
sector in the past
Boeing has raised its 20-year market
forecast for Indian commercial
aircraft purchases to $86bn from
$72bn last year
24th January, 2008
Industry Overview
Indian Aviation industry is one of the fastest growing aviation industries in the world.
With the liberalization of the Indian aviation sector, aviation industry in India has
undergone a rapid transformation. From being primarily a government-owned industry,
the Indian aviation industry is now dominated by privately owned FSCs and LCCs.
Private airlines account for approximately 75% share of the domestic aviation market.
Earlier air travel was a privilege only a few could afford, but today air travel has become
much cheaper and can be afforded by a large number of people due to introduction of
LCCs in the Indian aviation sector. However, Indian aviation is currently approximately
1.1% of the estimated global industry size (in operating revenue terms) of US$ 500bn.
The Indian aviation sector has been a laggard relative to its potential in the past.
Excessive regulation and high cost of air travel were the main reasons for this
sluggishness. However, all this is now changing and the sector has shown an explosive
growth over the last few years. Booming economy, growing proportion of consuming
class, deregulation and acceptance of the private carriers have been the main drivers of
this growth. Growth has accelerated with the entry of the Low Cost Carriers (LCCs) who
are giving price based competition to the incumbents.
Airports are the major infrastructure requirement for airline services. Given the current
level of congestion and expected increase in passenger traffic, we expect airports to be a
critical bottleneck for Aviation industry going forward.
Industry Outlook
With major upgradations of the national airports and their modernization that India is
undertaking at an estimated US$9bn by 2010, we expect an even paced capacity
addition in the airline sector. Much of the growth will emanate from regional distribution
of passengers and international traffic growth. India is one of the fastest growing
tourism destinations in the world. The World Travel & Tourism Council has estimated
that India's tourism economy will emerge as the world’s 3rd fastest growing over 2007-
16, growing at over 8% per annum in real terms. Robust economic growth, higher
disposable incomes, and growth in tourism & business travel, are the major demand
drivers. The long-term potential of the industry is immense and we expect a strong
growth in demand over the next few years as the growth drivers fall into place.
According to our estimates, the demand for domestic air travel is expected to grow at
above 25% for the next five years.
The number of domestic air passengers grew at a healthy 38.5% with 35.3mn
passengers flying in FY2007 against 25.5mn in FY2006. The Centre for Asia Pacific
Aviation (CAPA) has predicted that the domestic traffic would grow at 25%-30%
annually until 2010, taking the overall market to more than 70mn passengers. Aircraft
manufacturer Boeing has raised its 20-year market forecast for Indian commercial
aircraft purchases to $86bn from $72bn last year.
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Competitive scenario

Trend of consolidation in the
domestic aviation sector
Recently there has been a consolidation in the domestic aviation sector. From a
fragmented sector with more than 10 players, today there are 3 major players, and a
couple of other smaller players in the LCC space. These three together have a
combined market share of approximately 80%. We believe consolidation would help
the industry to increase passenger yield and match passenger demand.

Current Compettive Position

Company Fleet Size Market share (%)

Indian Airline & Air India 19.8 132
Jet Airways & Sahara (JetLite) 29.4 86
We believe consolidation will Kingfisher& Deccan 28.9 75
help Indian Aviation industry to Indigo 8.4 12
increase passenger yield SpiceJet 8.3 13
Other 5.2 14
Source:DGCA (Director Genaral of Civil Aviation, India)

Number of passengers carried has seen increasing trend over the past years for all
the Indian airlines. The demand for airline service or passenger travel depends
upon demand for business travel and leisure travel. An increase in country’s
economic activity is directly linked to the demand for business travel and an
increase in general income level is directly linked to the demand for the leisure
travel.

Total passenger carried (in mn)

Company 2003-04 2004-05 2005-06

Air India 3.8 4.4 4.9
Indian Airlines 7.4 8.6 8.8
Jet airways 6.9 8.1 9.5
Air sahara 1.9 2.7 2.9
Air Deccan 0.1 1.0 3.0
GDP growth in India will remain Kingfisher Airline N.A N.A 1.2
robust on the back of good SpiceJet N.A N.A 1.1
industrial production forecast Go Air N.A N.A 0.2
Paramount Airways N.A N.A 0.1
Sources: DGCA

We believe macro economic performance of India, in terms of per capita GDP, will
remain robust on the back of good industrial production forecast as well as
comfortable levels of inflation.

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Comparative Valuation

Current Share Price/ book Current EV/TTM

Company price Current EV value Sales
Deccan Aviation has lowest
current EV/ TTM sales multiple Deccan Aviation 169.95 2407.2 4.99 1.29
SpiceJet 67.65 2612.9 5.84 2.29
Jet Airways 28.9 11170.7 2.59 1.48
Source:company data

We believe that currently Deccan Aviation is trading at very attractive valuation. As we

expecting big development in airport infrastructure on the back of Government
expenses in airport development and committed FDIs from big companies such as
ETA Star, etc. In addition to this, we also expect growth in passenger travel on the
back of aggressive capex plan of airline companies and expected growth in GDP of
the country.

Merger of Kingfisher and Deccan Aviation

st
On 28 December 2007, On 31 May 2007, DA announced its intention of approving its 26% stake transfer to
Kingfisher’s stake has UB Group for Rs550cr. Kingfisher cannot fly overseas yet, because of rules in India,
increased to 45.97% after which allow only carriers with five years of experience on domestic routes to do so.
additional purchase through its After acquiring controlling stake in DA, which runs the largest low-fare carrier in the
subsidiary country, Kingfisher has decided to merge into the company in the next three months.
Deccan will complete five years of operations by August and the merger will allow
both brands to fly coveted overseas routes. After its initial purchase of 26% of stake in
DA, UB Group has continuously increased stake in DA. On 28 December 2007, UB
Group has purchased 2.95% stake through its subsidiary ‘Kingfisher Radio’. With this
additional purchase, UB Group reached to 45.97% stake in DA.

On 22 January 2008, both the
companies has approved the
merger
After merging itself with DA, Kingfisher can fly in the international market as DA will
get permission in the beginning of August, this year.
nd
On 22 January 2008, both the companies has approved the merger and expects that
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it will complete by 1 April 2008 with the majority stake of UB Group. According to the
merger terms, DA will remain publicly traded but name will changed to Kingfisher
Airline Ltd. In addition to this, Mr. Vijay Mallya will be the chairman & CEO and Capt.
GR Gopinath will be the Vice-chairman and their business models will remain largely
intact.

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DA plans to list its charter division
separately
DA has planned to hive off its charter division as separate company and will not be
affected by Kingfisher’s stake in the company. The company has also informed to list
it separately as the charter division contributes only marginal revenue but it has full
potential to grow as expected by the management of DA. We believe separate listing
of the company will unlock the share holder’s value in the medium to long term
horizon of 6 to 12 months.

In addition to the above, we expect following synergies from merger:

Sharing of physical resources both on ground and in air could potentially

spread fixed cost over a larger base and hence lower unit cost

Proper routes and network
Both the companies can rework on route and network strategies formation
strategies can improve load factor so that both the airlines benefit together as they have same flights
of the merged entity between two destination

After building their route and network strategies, they can increase their
passenger load factor.

Fleet expansion can be optimized to increase Available Seat per kilometer

(ASKs) as they will have more option to choose aircraft for short and long
haul operation accordingly.

350 25000

300
20000
250

15000
200

150
10000

100
5000
50

0 0
1/24/2007

3/9/2007

4/22/2007

6/5/2007

7/19/2007

9/1/2007

10/15/2007

11/28/2007

1/11/2008

Deccan Aviation BSE SENSEX

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Glossary:
DGCA: Director General of Civil Aviation, India; Regulator of Indian aviation companies which formulates and regulates
policies related to Indian aviation companies
ASK: Available Seat Kilometer; the total number of seats available multiplied by the number of kilometers those seats are
flown.
Load factors: Number of seat occupied by the passenger

DISCLAIMER

This document has been issued and approved by Parsoli Corporation Ltd.
It is not intended as an offer to buy or sell securities. The facts stated and estimated and opinions
given have been obtained from or based upon sources believed to be reliable; however no
representation or warranty, express or implied, is made nor responsibility of any kind accepted either
as to the accuracy, completeness or correctness of the information stated herein, or that material
facts have not been omitted. Any opinion expressed in this document is a matter of judgment at the
time of writing and is subject to change without notice.

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